Not so long ago, the possibility of oil trading under USD 30 per barrel would have been a strange idea.
Back in May of 2011, Light Sweet Crude was trading at USD 114 per barrel. There was an expectation that strong global demand that was being spurred on by massive injections of stimulus from the United States Federal Reserve would see oil at some stage challenge the July 2008 high of USD 147 per barrel.
However, here we are now, contemplating that the price of Light Sweet Crude could trade under USD 30 per barrel.
What if this freefall continued and oil fell to USD 20 or even USD 10 per barrel. Even after the collapse in prices that oil has experienced since 2011, some analysts are predicting that the price per barrel will cheapen further.
Among these analysts Investment bankers are some of the most bearish. Only recently Standard Chartered (L:STAN) has predicted that WTI will bottom out at the USD 10.00 per barrel. Such levels were last seen at the height of the Asian financial crisis of 1998.
Trying to predict a bottom in any market is very much akin to trying to catch a falling knife. Therefore, it is always best to note such predictions but always do your own homework.
Oil like other commodities has its priced price governed by simple laws of demand and supply. OPEC for many years controlled the price of oil. However in recent years, both the United States shale, production and Russian petroleum production has increasingly helped to challenge OPEC’s dominance.
Adding to the break of OPEC’s stranglehold on the price of oil has been the reduced demand from countries such as China, Germany and India due to contractions in their economies. In the case of Germany, there has also been a sustained investment in renewable technologies which has reduced this countries appetite for fossil fuels.
The breach of the USD 33.50 level was significant as this area coincided with an important prior monthly support level. According to data to hand, there next key level is the USD 25.00 area, however, the USD 30.00 per barrel level is becoming a key psychological level that needs to be overcome if oil is to fall further.
As for predicting levels that approach USD 20.00 or USD 10.00 per barrel, these scenarios could play out. However, as the market is so bearish with respect to the price of oil at the moment, the best course of action is to trade with the flow and see where this current trend takes us.
As yet there have been no signs of bottoming action. I would expect to see an exhaustion move that clears out the remaining longs and from this, a base can be formed, be it a double bottom, inverse head and shoulders or other such reversal price pattern.
Until the technical factors begin to point the way, the best course of action is probably to trade with the trend.